Entire Bogus Purchase Value Cannot Be Taxed When Corresponding Sales Are Undisputed

By | July 2, 2026
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Entire Bogus Purchase Value Cannot Be Taxed When Corresponding Sales Are Undisputed

Issue

  • Whether the Assessing Officer is justified in adding the entire value of alleged bogus purchases to the assessee’s taxable income under Section 69C when the corresponding sales are accepted, no stock discrepancies exist, and only the profit element embedded in those purchases should be brought to tax.

Facts

  • The assessee is a trader engaged in the business of ferrous and non-ferrous metals.

  • For the Assessment Year 2018-19, the Assessing Officer reopened the assessment based on information from the Insight portal.

  • The information indicated that the assessee had made purchases worth approximately ₹50.34 lakhs from five entities alleged to be accommodation entry providers.

  • The Assessing Officer treated these purchases as completely bogus and added the entire amount of ₹50.34 lakhs back to the assessee’s income as unexplained expenditure.

  • The tax department did not dispute or challenge the corresponding sales made by the assessee, and no discrepancies were found in the physical stock records.

Decision

  • Held that once the corresponding sales of the trader are accepted by the tax department, the entire purchase amount cannot be treated as a bogus addition.

  • Held that since the goods must have been procured from the open market to fulfill the accepted sales, only the profit element embedded in such purchases can be added to the income.

  • Held that the addition is to be restricted to a reasonable profit rate of 8% of the alleged bogus purchases, rather than the entire 50.34 lakhs, partly ruling in favor of the assessee.

Key Takeaways

  • Sales Acceptance Validates Source of Goods: In trading businesses, if the tax department accepts the sales turnover, it cannot logically disallow 100% of the corresponding purchases, as goods must have been acquired from somewhere to facilitate those sales.

  • Additions Restricted to the Profit Element: Where documentation from suppliers is found to be non-genuine but the physical transaction of goods is backed by matching sales, additions under Section 69C are legally limited to taxing the estimated profit margin (often standard at 8%) saved by purchasing from the grey market.

IN THE ITAT AHMEDABAD BENCH ‘B’
Pruthvi Singh Solanki
v.
Income-tax Officer
Sanjay Garg, Judicial Member
and Narendra Prasad Sinha, Accountant Member
IT Appeal No. 299 (Ahd) of 2026
[Assessment year 2018-19]
JUNE  23, 2026
Prashant Upadhyay, AR for the Appellant. Abhijit, Sr.DR for the Respondent.
ORDER
Sanjay Garg, Judicial Member.- The present appeal has been preferred by the Assessee against the order of the learned Commissioner of Income Tax (Appeals), National Faceless Appeal Centre (NFAC), Delhi [hereinafter referred to as ‘CIT(A)’] dated 09.12.2025 for the Assessment Year (AY) 2018-19.
2. The assessee in this appeal raised following grounds of appeal:
“1. The learned CIT (A) has erred in confirming an addition of Rs. 50,33,695/- alleging bogus purchases without proper appreciation of the documents and evidence submitted by the appellant to learned assessing officer.
2. The learned CIT(A) erred in holding the transactions as accommodation entries merely on the basis of alleged discrepancies in transport documents and common transporters, without bringing any positive or independent evidence on record to establish that no goods were actually received by the appellant.
3. The learned CIT (A) failed to appreciate that the Assessing Officer neither rejected the books of account nor disputed the corresponding sales, stock records, or consumption of material, thereby rendering the addition of the entire purchase amount legally unsustainable.
4. The learned CIT(A) erred in relying upon third-party statements and general observations without providing the appellant an effective opportunity to cross-examine the persons whose statements were relied upon, in gross violation of the principles of natural justice.
5. The appellant craves leave to add, amend, modify, or withdraw any of the above grounds at the time of hearing”
3. A perusal of the above grounds of appeal would reveal that the Assessee in this case is aggrieved by the confirmation of the addition of Rs. 50,33,695/- made by the Assessing Officer, (for short, “the AO”) by holding that the purchases made by the Assessee were bogus.
4. The Assessee is an individual and is involved in the business of trading in ferrous and non-ferrous metals in the name of ‘Vinay Enterprises’. The Ld. AO got the information through the Insight portal that the Assessee had made certain purchase transactions with bogus/paper entities who were involved in providing accommodation entries. On the basis of such information, the assessment of the Assessee was reopened. During the assessment proceedings, the AO observed that as per the information available, the five entities as mentioned in the assessment order were involved in providing accommodation entries by way of fictitious/bogus invoices. The AO found that the Assessee had made total purchases of Rs. 50,33,695/- from the alleged entities involved in providing bogus billings. He added the entire purchases of Rs. 50,33,695 / – into the income of the Assessee. The Ld. CIT(A) confirmed the addition so made by the Ld. AO.
5. We have heard the rival contentions and gone through the record. The Assessee in this case, admittedly, is a trader and not a manufacturer. The Assessee had shown corresponding sales against the alleged purchases. The sales of the Assessee have not been doubted or disputed by the AO. There is also no allegation that any stock verification was done and that the stock of the Assessee was found less. Once the sales have been admitted in case of a trader, it is obvious that he had also made purchases that have been further sold to other parties. Therefore, as held time and again, the entire purchases in the case of a trader cannot be added. So far as the allegation that the Assessee had shown purchases from certain suspected entities, who were allegedly involved in providing bogus billing etc., the probability at the most can be that the Assessee might have made purchases from the grey market at a lower rate and would have obtained bogus bills at a higher rate from the alleged entities to suppress his profits. Under the circumstances, as held time and again by various courts of law, only the profit element embedded in such purchase/sales transactions can be added and not the entire purchase amount. It is also not the case of the Revenue that the Assessee had made the alleged purchases from any undisclosed sources of income. The purchases have been made through banking channels and duly recorded in the books of account. Hence, considering the overall facts and circumstances, only the profit element embedded in such purchases should have been added by the Ld. AO.
6. Though the Ld. AR of the Assessee has contested the entire addition on merits, however, on discussion, he has fairly agreed that 8% of the purchases, on account of suppressed profits on such purchases, may be added.
7. The Ld. DR has also been fair enough to admit that the estimation of profit element at the rate of 8% of the alleged bogus purchases was quite reasonable.
8. Considering the above submissions, the addition is restricted to 8% of the alleged bogus purchase amount of Rs. 50,33,695 /-.
9. In the result, the appeal of the Assessee is partly allowed.